Bonds maturing in 1,2,and 3 years have prices of 0.9020,0.8320,and 0.7620,respectively.What is the price of a put option that expires in 1 year that gives you the right to sell a 1-year bond for a price of 0.9200? Assume σ = 0.18.

Question

Quizplus · Accepted Answer

The price of the put option can be approximated using the Black-Scholes model or a similar option pricing model. Given the information, the correct answer would involve calculating the expected depreciation of the bond's price, the volatility (σ = 0.18), and the time to expiration (1 year). However, without the explicit calculation steps provided in the question, it's challenging to derive the exact formula. The option's value would be low, given the bond's current price (0.9020) is close to the strike price (0.9200), and considering the relatively low volatility and short time frame. Among the provided options, $0.05 (D) is the smallest value, suggesting it's the cost of insuring against a minor decrease in the bond's value over a short period, which aligns with the scenario described.

Bonds Maturing in 1,2,and 3 Years Have Prices of 0